Petrol margins soar above Rs 11 per litre. Should you buy oil marketing company stocks now?

India's fuel retailers are raking in marketing margins of Rs 11.2 per litre on petrol and Rs 8.1 per litre on diesel in FY26 so far, sparking buy recommendations from brokerages as oil prices hover below $70 per barrel since March.

The margin windfall, tracking "significantly ahead of normative levels," has created what brokerages see as a rare opportunity in oil marketing company (OMC) stocks, with the benign crude oil price outlook expected to support earnings for the rest of the financial year.

"Marketing margins on diesel/petrol at Rs 8.1/11.2 per ltr in YTDFY26 are tracking significantly ahead of normative levels. Such elevated marketing margins have room for positive surprise to our/consensus estimates in FY26E even if there is some hike in excise duty by the govt," said Bhaskar Chakraborty, equity analyst at Jefferies.

The profit surge comes as oil prices have remained below $70 per barrel since March, with OPEC+ increasing supplies by 2.2mbpd between April-25 and September-25. Demand is projected to increase only 0.68mbpd in CY25, with expectations of 1.5mbpd oversupply in Q4CY25, according to the International Energy Agency.

HSBC's analysis reveals the multi-layered profit boost: "Lower oil price is supportive of strong auto fuel marketing margins (currently cINR5-9/litre) and this augurs well for the FY26 earnings. In addition, global LPG prices have also decreased, leading to 30-40% reduction in LPG losses per cylinder currently versus 1QFY26."

"Lower oil prices will also reduce the working capital requirement, thus reducing the borrowing needs," HSBC said, while noting that "with inventory losses already booked in 1QFY26, and Brent prices $65-67/b, with stable oil prices, shocks from inventory losses are less likely."

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Target price upgrades are flowing thick and fast. HSBC raised HPCL's target price to Rs 520 from Rs 490 and IOCL's target to Rs 190 from Rs 180, maintaining buy ratings across BPCL, HPCL, and IOC. "We increase marketing margin estimates given low crude oil prices leading to higher earnings," the brokerage stated.

Jefferies takes a more nuanced approach, expressing a clear preference for BPCL over peers. "This bodes well for BPCL's earnings over HPCL's, as the latter will be impacted more from any excise duty hike," Chakraborty noted, highlighting BPCL's relative resilience to potential government policy changes.

The preference extends to valuations. "Stock has corrected 10% over the past year and trades at 1.4x fwd P/B, in line with HPCL, unlike the premium it used to trade at in the past. BPCL's current discount to Nifty of 55% on fwd P/B compares favorably with LT avg of 31%," Jefferies observed.

Jefferies maintains a buy rating on BPCL with a price target of Rs 410 at 1.8x September-26 P/B, and on IOCL with a target of Rs 160 at 1.1x September-26 P/B. However, the brokerage remains cautious on HPCL, maintaining an underperform rating with a target of Rs 340.

"HPCL's earnings likely to be dragged by new project commissioning: Our analysis of past greenfield capacity addn or complexity increase in OMCs show years of drag on earnings due to long period to stabilize operations," Jefferies warned, citing the complexity increase in Vizag and the start of greenfield refinery in Rajasthan by end-FY26.

HSBC's broader optimism extends beyond just marketing margins. "GRMs continue to trend lower than long-term averages, but product cracks remain healthy and higher than FY25. This indicates refining profitability could be better than last year if Russian crude mix does not alter too much."

The earnings upside isn't limited to fuel margins. HSBC noted that the government has provisioned Rs 300 billion towards compensating OMCs for LPG losses, though details on the payout mechanism are awaited. "These trends present upside risks to earnings forecasts," the brokerage concluded.

With oil prices expected to remain range-bound and marketing margins at multi-year highs, OMC stocks appear to offer what HSBC calls "a large margin of safety" – a rare commodity in today's volatile markets.

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)